Requirements to Notify IIROC under the Electronic Trading Rule Amendments

Transcription

1 Rules Notice Technical UMIR Please distribute internally to: Legal and Compliance Trading Contact: Deanna Dobrowsky Vice President, Market Regulation Policy Telephone: Fax: February 28, 2013 Requirements to Notify IIROC under the Electronic Trading Rule Executive Summary On March 1, 2013, amendments to UMIR come into effect respecting electronic trading on Canadian marketplaces ( ). 1 Currently, all marketplaces trading listed securities in Canada operate as electronic markets. The require Participants and Access Persons trading on these marketplaces to adopt, document and maintain a system of risk management and supervisory controls, policies and procedures to manage risks associated with access to marketplaces and electronic trading for all orders. Under the, certain arrangements between a Participant and a third party trigger a requirement for the Participant to notify IIROC. This Rules Notice responds to questions on these notification requirements and the manner in which a Participant should provide notice. This Rules Notice repeals and replaces, effective March 1, 2013, IIROC Notice Rules Notice Technical Requirements to Notify IIROC under the Electronic Trading Rule (February 7, 2013). As an administrative matter, a Participant that 1 See IIROC Notice Rules Notice Notice of Approval UMIR Provisions Respecting Electronic Trading (December 7, 2012) and IIROC Notice Rules Notice Guidance Note UMIR Guidance Respecting Electronic Trading (December 7, 2012).

2 uses the services of a third party for Risk Management Controls may provide to IIROC the contact information of a person at the Participant if this would be a more appropriate initial contact. Background The expand the existing supervisory requirements for trading to specifically include the establishment and maintenance of risk management and supervisory controls, policies and procedures related to access to one or more marketplaces and/or the use of an automated order system ( Risk Management Controls ). 2 The provide in Rule 7.1(7) that a Participant may, on a reasonable basis: (a) (b) authorize an investment dealer to perform on its behalf the setting or adjusting of a specific risk management or supervisory control, policy or procedure; or use the services of a third party that provides risk management and supervisory controls, policies and procedures. The Participant must also enter into a written agreement with the investment dealer or third party. 3 A Participant that enters into either of the arrangements set out in Rule 7.1(7) must forthwith notify IIROC of: the name of the investment dealer or third party, as applicable; and the contact information for the investment dealer or third party. 2 3 Effective March 1, 2013, Rule 7.1(6) provides: Notwithstanding any other provision of this Rule, a Participant or an Access Person shall adopt, document and maintain a system of risk management and supervisory controls, policies and procedures reasonably designed, in accordance with prudent business practices, to ensure the management of the financial, regulatory and other risks associated with: (a) access to one or more marketplaces; and (b) if applicable, the use by the Participant, any client of the Participant or the Access Person of an automated order system. Effective March 1, 2013, Rule 7.1(8) provides: An authorization over the setting or adjusting of a specific risk management or supervisory control, policy or procedure or retaining the services of a third party under subsection (7) must be in a written agreement with the investment dealer or third party that; (a) precludes the investment dealer or third party from providing any other person control over any aspect of the specific risk management or supervisory control, policy or procedure; (b) unless the authorization is to an investment dealer that is a Participant, precludes the authorization to the investment dealer over the setting or adjusting of a specific risk management or supervisory control, policy or procedure respecting an account in which the investment dealer or a related entity of the investment dealer holds a direct or indirect interest other than an interest in the commission charged on a transaction or reasonable fee for the administration of the account; and (c) precludes the use of a third party unless the third party is independent of each client of the Participant other than affiliates of the Participant.

3 This contact information enables IIROC to deal with an investment dealer or third party in the event that IIROC wants additional information with respect to the entry of an order or execution of a trade. Questions and Answers The following are specific questions respecting the notification requirements in the and IIROC s response to each question. 1. How do we notify IIROC? Send an containing the information to ETRReporting@iiroc.ca using IIROC s secure system, EMX What information is required in the ? If you are using a third party to provide Risk Management Controls, your must contain: a statement that your firm is using a third party to provide risk management controls; the name of the company; and a phone number or address to allow IIROC to contact the company or, if appropriate, the Participant. If you are authorizing an investment dealer to perform on its behalf the setting or adjusting of a Risk Management Control, your must contain: a statement that your firm has authorized an investment dealer to set certain risk management controls for itself; the name of the investment dealer; and a phone number or address to allow IIROC to contact the investment dealer. 4 For information about EMX, refer to IIROC Notice Rules Notice - Technical - UMIR - Requirements for Secure Electronic Regulatory Communication (February 7, 2013).

4 3. We use multiple technology vendors. Do we provide notification on all vendors? You must provide information only on the company or companies that provide you with Risk Management Controls used to comply with the requirements in the. For example, if you use one company to supply your Risk Management Controls, and a separate company to provide you with order routing services that do not include Risk Management Controls, your notification must contain information only about the company that supplies you with Risk Management Controls. If you use more than one company to supply you with Risk Management Controls, you must provide information on all such companies. 4. We have authorized more than one investment dealer to set certain risk management controls. Do we send more than one ? You must provide information about each investment dealer to whom you have authorized certain Risk Management Controls. You can send information about more than one investment dealer in one , or you can send a separate for each investment dealer. 5. I use a vendor for risk management controls but I have not authorized an investment dealer to set those controls. Am I still required to notify IIROC? Yes. A notification requirement is triggered by either arrangement coming into place. These are separate notification requirements. 6. I am using risk management tools from a well-known vendor who provides this service to many firms. Am I still required to provide contact information? Yes. 7. IIROC is giving firms until May 31, 2013 to complete testing and fully implement the automated controls set out in the. We are in the process of testing our automated controls. Can we wait until May 31 to provide notice of our third party risk management controls provider? No. The requirement to notify IIROC of your third party provider becomes effective on March 1, This date is not impacted by any testing that may be ongoing.

5 8. We are using the risk management tools supplied by our affiliate company. Is this considered a third party and do we need to provide notice? Yes.